Energy budget discussions on 25 May revealed the Tanzanian government will review existing power-purchasing agreements governing gas-to-electricity projects, probably to improve the credit profile of the wholly government-owned electricity supplier. Renewable energy projects are emerging as a priority for future power generation.

• A presidential audit committee will begin this year to renegotiate capacity charges in power off-take agreements for gas-to-electricity suppliers as part of a strategy to improve the wholly government-owned Tanzania Electricity Supply Corporation's credit profile.
• This committee is likely to simultaneously renegotiate the share of profit gas and government ownership in upstream production-sharing agreements held by operators at the southeastern, near-shore Songo Songo gas field.
• By contrast, political support for new renewable energy projects is increasing. However, a final investment decision on the development of a three-train, deep-sea liquefied natural gas export terminal will probably be delayed until at least 2022.

Tanzanian Comptroller and Attorney-General (CAG) Adelardus Kilangi on 25 May told the' National Assembly that an electricity off-take agreement signed with Songas Limited, which is in force until 2023, would be audited and then renegotiated this year. Songas operates the Ubungo power plant and is a subsidiary of UK- and Norwegian-owned Globeleq Generation Limited. Kilangi's comments coincided with the parliament discussing the Ministry of Energy's budget priorities for the 2018/19 fiscal year, which commences on 1 July 2018.

President John Magufuli's government wants to ameliorate wholly government-owned Tanzania Electricity Supply Company's (TANESCO) indebtedness, as we previously assessed. TANESCO reported in November 2016 that it would need to raise a total of USD2.4 billion by 2020 to clear its debts and finance additional electricity generation and distribution capacity. TANESCO also stated that it had accumulated USD363 million in total payment arrears by end-2016. Government efforts to reduce TANESCO's indebtedness by utilising external financing have made limited progress. This is primarily because the World Bank in June 2017 removed USD200 million in concessional financing for this purpose from its list of priorities.

Consequently, TANESCO's debts will gradually be cleared by reducing monthly capacity charges in power purchasing agreements (PPAs). This possibility was already facilitated by legal changes in July 2017. These weakened stability clauses in existing contracts made arbitration in foreign courts prohibitive, and the execution of compensation awards through the national courts is unlikely if the government perceives that these payouts contravene the "public interest".

The government is also likely to continue blocking revisions to electricity tariffs, as these would increase costs to ruling Revolution Party (Chama Cha Mapinduzi: CCM) supporters - who are largely based in rural, agricultural areas - and undermine the domestic industrialisation strategy. For instance, in June 2017, Magufuli suspended the head of the regulator responsible for setting tariffs shortly after he proposed an increase to improve TANESCO's financial health.

TANESCO's credit risk
The contract renegotiations are motivated by the government's inability to improve TANESCO's credit profile. Payment arrears have accumulated from capacity charges and tariffs associated with emergency, diesel-fuel arrangements signed in the mid-1990s and mid-2000s, as well as arrangements agreed in donor-funded projects. Power producers also utilised a 'take-or-pay' facility in which the government was liable for capacity charges even when electricity was not delivered.

The resulting discrepancies in off-take charges are demonstrated by a 2015/16 CAG report published in March 2017, which estimated that, on average, TANESCO purchased electricity at twice the price it was sold on for. According to TANESCO in the same report, Songas charged the lowest energy price (USD0.03 per kilowatt hour), but levied the most expensive monthly capacity charge (USD5.27 million). Consequently, average off-take payment delays across all gas-to-electricity producers have accumulated to 9-12 months in duration.

Renewable energy prioritised
Separately, Minister for Energy Medard Kalemani on 27 May told parliament that USD307 million - around 41% of the ministry's total budget - will be allocated to development of the planned 2,100-megawatt (MW) Stiegler's Gorge hydropower project located in Morogoro region. Construction of the project is planned to commence in July 2018 with an initial phase of 300 MW being generated at capacity by 2024. The minister also stated that private foreign investment into wind and solar power was a priority. For instance, a private consortium began construction in October 2015 of the USD285-million Singida Wind Power Station, Tanzania's first wind power project. Construction of the power station commenced once the consortium finalised a Ministry of Finance guarantee, shortly after President Magufuli was elected to office.

The budget discussions did not focus on improving the slow progress in finalising a host government agreement to develop a liquefied natural gas (LNG) export terminal, which would be fed by two trains from offshore Blocks 1 and 4 (operated by Shell) and Block 2 (operated by Equinor, formerly Statoil). Partners to the LNG project had specified that a final investment decision was expected in 2022, and IHS Markit Energy assesses commercial start-up is unlikely until 2030 at the earliest.

Outlook and implications
The government is now likely to renegotiate PPAs simultaneously with production-sharing agreements held by foreign operators at the Songo Songo field that supply gas to Songas. These contractual arrangements are complex and the committee would probably focus on negotiating a more favourable share of profit gas. This is despite upstream producers being subject to a large domestic-supply obligation (set by a separate gas supply agreement), which results in the operator supplying a share of the gas they produce to TANESCO at below market prices.

Separately, the budget discussions indicate a preference for foreign investment in renewable energy. In terms of financing, preference will probably be given to concessional, multilateral arrangements, particularly where these include partial credit guarantees to offset TANESCO's credit risk. This is in part due to President Magufuli's government being critical of bilateral creditors, especially China Export-Import Bank, which are perceived to offer more onerous terms, such as unfavourable debt-to-equity swaps that threaten to reduce the government's ownership of critical infrastructure. The ruling CCM on 29 May appointed Bashiru Ally Kakurwa as the party's new secretary-general, following his predecessor Abdulrahman Kinana's retirement on 28 May after five years in office. The secretary-general is the most influential member of the CCM's highest decision-making body, after President Magufuli, who is the chairperson. If, therefore, in the unlikely event Kakurwa voices opposition against the Stiegler's Gorge project, then budgetary allocations are likely to be rebalanced and begin to favour LNG development.

Tenders for new renewable energy projects are unlikely to operate under a feed-in-tariff arrangement. Instead, competitive arrangements allowing the government to bid down capital costs are more likely. However, the government is likely to reduce the regulatory burden by simplifying processes of land acquisition (and compensation payments to local communities) and environment impact assessments, particularly as new renewable energy projects would probably be co-ordinated through the president or prime minister's office.